Proposed Tax Increases and Optimizing Healthcare Dollars

Proposed Tax Increases and Optimizing Healthcare Dollars

In the wake of the East Coast’s most recent bout with old man winter and following a holiday season that seems like it was months ago, we have decided to take a quick “tactical” pause to pass on a few thoughts on some of recent news coverage of various tax increase proposals in President Obama’s State of the Union, and offer some insights on how to optimize your healthcare dollars. As always, we look forward to your feedback and hope you find value in these newsletters.

Our Perspective on President Obama’s State of the Union Tax Proposals

During President Obama’s State of the Union address, he proposed several tax changes, potentially adding $320 Billion in taxes over the next 10 years.

* Higher maximum long-term capital gains and dividends

* Tax increase on inherited investments

* Tax increase on 529 college savings plans

* Retirement Plan Changes

Capital Gains Rate Increase:  Presently, the maximum individual federal income-tax rate on long-term capital gains and qualified dividends is 23.8% (20% capital gains rate plus 3.8% for the Medicare surtax on net investment income - NIIT). President Obama’s proposal would raise the maximum rate to 28%, an >80% increase from the previous long-term gains and qualified dividends rate of 15%. We do not believe that a Republican controlled Congress will agree to this.

Inheritance Step-up in Cost Basis:  Under current law, when one inherits assets (stocks, mutual-fund shares, real estate, coins, stamps, other collectibles, etc), the value of those assets is “stepped-up” to the current market value on the date of death (or six months later, if chosen), re-setting the cost basis for heirs and thereby reducing future capital gains taxes. President Obama wants to repeal the basis step-up rule, which could potentially expose inherited capital assets to both the 40% federal estate tax (for those with an estate exceeding the published limits) and the federal capital-gains tax, which would be increased to 28%. We do not see Republicans approving of this either.

529 College Savings Tax:  Under current tax rules, the gains on 529 college-savings grow tax-free, provided the funds are used for qualified education expenses. Recent research has shown that approximately 12 million 529 accounts were outstanding/open in 2014 with about $245 billion in assets. That translates into an average account balance of about $21,000. In the State of the Union address, President Obama proposed taxing the growth as a way to partially fund his ’two years of college free for everyone.’ This plan was ‘dead on arrival – DOA’ and was retracted within days of the speech.

Retirement-plan changes:  President Obama proposed a new $3.4 million cap on the total amount that an individual could accumulate in IRA and 401(k)-type accounts. This has been referred to as the ‘Romney tax’ in that President Obama was seeking to limit (and tax) large IRAs like Mr. Romney’s - disclosed during the most recent presidential election. As with these other proposals, we do not think this one has any chance with a Republican-controlled Congress.

Optimizing Personal Healthcare Spending

In advance of the February 15th enrollment deadline per the Affordable Care Act, we thought we would pass along some suggestions for how to get the most out of your healthcare spending dollars.

1.  Out of Pocket Maximums:  To determine the ‘right’ level of coverage, start by asking yourself how much money you could put towards an unexpected healthcare expense without tapping retirement accounts or credit cards. Look for a health care plan which caps your expenses at that level, if not lower.

2. Take advantage of cost estimate and comparison tools:  The Wall Street Journal reported recently that a nonprofit data analysis group provides free tools to estimate medical and dental costs in your area You also can get free cost benchmarks at

3. Shop for cheaper drugs:  If you’re paying more than a few dollars for generic drugs, you could be missing out. Discount programs at grocery, pharmacy and big-box chain stores offer 90-day supplies of generic drugs for $10. When doing your research, be sure to understand whether there are annual fees or other conditions in addition to the co-pay.

4. Review your bills and explanations of benefits right away:  Reach out to your insurer and sort through differences before overdue bills are sent to collections, potentially impacting your credit score. You have the right to appeal a claim with your insurer. If you can’t pay your share, call the provider and request a reduction or extra time to pay the amount owed off in installments.

5. Find a doctor who’s a good fit for you:  A sound relationship with a primary care physician is critical for people with chronic conditions and can mitigate the risk of extraneous medical expenses.

6. Use retail clinics and urgent-care centers: These facilities should be used appropriately for non-life-threatening health needs, as they are usually less expensive than hospital emergency departments.

7. Eldercare matters:  Consider engaging an advocate to help sort through the bureaucratic maze of benefits and programs of Social Security, Medicare, and the U.S. Department of Veterans Affairs. A resource we have found to be extraordinarily helpful is Accountable Aging Care Management (